Proof-of-Work 101: Here’s What You Need to Know

Part of our back to basics series, this time round focused on the most popular consensus algorithm in a blockchain network.

For most people blockchain is just a buzzword they may have heard about in local newspapers, or on a TV. So we are starting the “back to basics” series to explain all the phrases used to make blockchain and cryptocurrency transactions possible.

Today’s topic is Proof of Work, so let’s get started…

1. What is Proof-of-Work?

Proof-of-Work, or PoW, is the original consensus algorithm in a blockchain network which is used to confirm transactions and produce new blocks to the chain.

The PoW enables miners to compete against each other to complete transactions on the network and get rewarded for their efforts. Miners do their work by solving complicated mathematical puzzle at the end of which a new block of transaction is created and added to the chain, where all other blocks of transactions reside.

2. What are these mathematical puzzles?

Mathematical puzzles are the reason why mining takes so much electricity, with CPU, GPU and usage of dedicated mining machines (ASIC) consuming all the power they can get.

There are many mathematical puzzles out there, such as:

hash function, which is looking to find the input when the output is known.

integer factorization, which presents a number as a multiplication of two other numbers.

guided tour puzzle protocol, which requires a calculation of hash functions, for some nodes in a defined order.

At the end of these puzzles is the answer that is known as “hash.” And the tricky part comes with the network growth when puzzles become increasingly complicated, requiring more and more power to be solved.

However, once created – hash can be easily verified, as accurate work and speed of the entire blockchain depends on it. Also, the ability to easily verify hashes, thus transactions on a blockchain, ensures the transparency of the network. And that’s one of blockchain’s key features.

3. How is PoW implemented in a blockchain?

As noted above, PoW allows miners to solve puzzles, form and add blocks to the chain of transaction. They effectively verify and confirm all transactions, and keep the network alive.

In a blockchain, the hash of each block contains the hash of the previous block, which increases security while making sure transactions are immutable. This mechanism is included in the PoW algorithm.

4. Which cryptocurrencies use PoW?

Many, with the most prominent example being Bitcoin; it uses the Hashcash puzzle that allows changing the complexity of a puzzle based on the total power of the network. In the Bitcoin network, the average time of block formation is 10 minutes.

Litecoin is also using a similar system, and so does Ethereum. This in turn makes Proof of Work the single most popular consensus algorithm for blockchain networks. There are other algorithms which we will be discussing in some other articles.

5. Are there any other benefits of using PoW?

PoW imposes some limits on actions in the network which in turn provide defense from Denial of Service (DoS) attacks. It takes a lot of effort (processing power) to execute a PoW algorithm, making it next to impossible for hackers to break into the blockchain. It could be possible, but it would require tremendous resources to “attack” a blockchain. And even then, other nodes in the decentralized network would notice something’s wrong with one of its nodes.

In addition to protecting against DoS attacks, PoW limits one’s mining possibilities, keeping the system decentralized. While there are Bitcoin farms out there and one can’t mine Bitcoin from his/her PC these days, even those big farms of dedicated mining computers rotate — there is no single company in charge of all the mining in the Bitcoin blockchain.

6. What are the issues of PoW?

PoW requires a ton of power along with specialized computer hardware (so called ASIC machines) to run its complicated algorithms. This has led to the creation of special mining pools, which consume large amounts of power. And these large costs threaten centralization of the system.

Computational power is also wasted in the process. Aside from solving mathematical puzzles needed to complete the block, mining computers don’t do anything else. The security of the blockchain network is valuable — there’s no doubt about it — but there is a huge waste of resources, as a result.

DISCLAIMER: Opinions expressed here are author's alone, not those of any partner bank, credit card issuer, hotel, airline, or other partner. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.

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